Private Equity for Real Estate

For the last year or so I have been working in the world of raising money for investment funds focused on real estate. Primarily we are building a database and calling on university endowments, state and other public pension funds as well as private pension funds (like corporate pension plans). The fund managers that we are raising capital for are all first time managers.

The process is an interesting one. There are literally billions of dollars in investment capital available but the pension fund reps are so overwhelmed with inquiries seeking capital that it is very tough to break in a new manager.

The system seems very "broken" when you start to learn about it. There are undoubtedly many, many new managers that could produce excellent returns for these pension funds (and given the increasing demands for returns by the funds, they need high returns), but because of the information asymmetry problem (no time to vet new managers or manage the risk inherent in a new manager), few new managers are given a chance.

Shouldn't there be some kind of "farm system" for new managers? Something where an investment club of save 5-10 similarly situated endowments or funds like Harvard, Yale, MIT, UC or Calstrs, Calprs, NYSTRS could invest relatively small amounts (say $5M each) and fund a new manager or group of managers? Then as the manager are vetted they can "graduate" to the next level where they have their own fund with larger amounts from each investor? And the investors, for their hard work and risk get the opportunity (and right) to invest in future funds?

Seems like technology could also enable this. By having a simple web based management/governance system that goes from gathering initial submissions to monitoring investment performance, you could somewhat automate the process of managing this small program and make it functional for the large funds to try this.

There are a couple firms with allocations from Calstrs doing this now - but they are really creating their own fund in cooperation with the emerging manager and taking a piece of the promote -which is not as attractive for the manager, obviously.